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October 7, 2013

Alternative Mutual Fund Assets to Reach 14% in 10 Years: Cerulli

Fixed income, need for noncorrelation driving the trend

It’s well-known that allocations to alternative investments are growing at startling rates, but putting numbers to the inflows make them all the more startling.

Analysis by Pension & Investments found that since the start of 2011 investors had made a total of $94.6 billion in alternative investment commitments, including real estate, compared with $79.6 billion to equities and fixed income.

This compared with $15.4 billion committed to alternative investments and real estate just eight years earlier in 2003 by North American investors. In that same year, the magazine added, investors made $65.9 billion of combined investments in equities and fixed income.

Part of the move is being fueled by rising interest rates, as well as investors' realization, post-2008, of the need for noncorrelated asset classes.

Now new research from Boston-based research firm Cerulli Associates finds that asset managers expect alternative mutual fund assets to comprise close to 14% of all mutual fund assets in the next 10 years.

"Since the financial crisis in 2008, institutions and advisors have been under pressure to increase returns while keeping risk unchanged,” Michele Giuditta, associate director at Cerulli, said in a statement. “As a result, alternative products are attracting interest from retail and institutional investors, as both are increasingly looking for portfolio diversification, enhanced returns, and risk management."

"Consistent with asset managers' expectations, we anticipate the use of alternatives in individual investors' portfolios to grow," Pamela DeBolt, senior analyst at Cerulli, added. "Alternative mutual funds currently comprise about 2% of total mutual fund assets and we expect that number to grow to 14% in the next 10 years."

Cerulli argues that asset managers should move past positioning alternative investments as one asset class — there are a number of asset classes, strategies and vehicles that fall under the umbrella of alternatives.

"According to our advisor research, 25% of advisors plan to increase their allocations to alternative mutual funds, with 5% indicating they plan to increase their allocations by more than 10%," DeBolt concludes. "We've already seen an increase in the number of advisors incorporating alternative mutual funds into client portfolios."

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